The Influential Investor. How UHNW and HNW investor behaviour is redefining performance in wealth management and private banking

Center for Applied Research
INFLUENTIAL
INVESTOR
How Investor Behavior is
Redeﬁning Performance
THE

About the Center for Applied Research
The Center for Applied Research (CAR) conducts targeted research designed
to provide our clients with strategic insights into issues that will shape the
future of the investment industry. Building on the success of State Street
Corporation’s established Vision thought-leadership program, CAR brings
together resources within the industry and across State Street to produce
timely research on the topics that are most important to investors worldwide.
CAR is an independent think tank that resides at State Street’s corporate level
and comprises a global team of researchers located across the Americas,
Europe/Middle East/Africa and Asia Pacific. CAR selects its research topics
based on input from global investment management industry professionals.
The 12- to 18-month research studies will include both primary research
methods — driven by face-to-face interviews and surveys — and secondary
research methods. Research is global in scope, covering the Americas,
EMEA and Asia Pacific, and include topics such as:
Investor behavioral shifts
Asset depth
Asset allocation patterns
Regulatory implications
Fee and alpha analysis
Competitive landscape analysis
CAR can customize delivery approaches, providing company briefings,
conferences and multimedia presentations to meet your c-suite and board
of director needs at no cost.
If you would like more information about this study or the Center for
Applied Research, you may contact the authors or send an e-mail to
CenterforAppliedResearch@statestreet.com.

3THE INFLUENTIAL INVESTOR: HOW INVESTOR BEHAVIOR IS REDEFINING PERFORMANCE
Introduction
What are the forces that will shape the future of the investment
management industry over the next decade? That was the ques-
tion we set out to answer when we began this research effort.
Over the course of a 12-month period,1
we collected the views
of thousands of retail and institutional
investors, asset managers, intermedi-
aries and regulators from more than
60 countries. And, after extensive
analysis of their responses, one thing
became clear: The future of the invest-
ment industry will be determined by
the actions investors take — healthy
or unhealthy, rational or irrational. This is
what we mean by the “inﬂuential investor.”
But how are investors acting? Why are they behaving that way?
Is the industry delivering meaningful value?
Understanding the answers to these questions will be the key
to generating sustainable returns in the future. Only then can
the industry begin to redeﬁne the most important word in the
investment management vocabulary: performance.
THEFUTUREOFTHEINVESTMENT
INDUSTRYWILLBEDETERMINED
BYTHEACTIONSINVESTORSTAKE—
HEALTHYORUNHEALTHY,
RATIONALORIRRATIONAL.

EXECUTIVE SUMMARY
The investment management industry is facing significant challenges that are
changing how the industry thinks about performance, the delivery of value and
the measurement of success. These changes are taking place against a back-
drop of increased regulatory oversight and a growing awareness of the financial
system’s instability among all classes of investors.
Faced with uncertainty, many investors — both retail and institutional — are
not acting in their own best interest, exhibiting behavior that appears to be at
odds with their stated goals. This behavior is driven by an increased awareness
of economic factors, such as central bank intervention and global convergence,
and a series of deeply misaligned interests among many participants, including
providers and intermediaries, asset owners and managers, and governments,
regulators and politicians.
One thing is clear: When it comes to performance, one size does not fit all.
The industry’s value proposition must evolve to one that defines performance
as personal. The current benchmark model does not speak to the needs of
the investor. Relative performance based on peer groups or indices may serve
the provider, but the investor’s view of value is more complex and reflects their
own personal blend of alpha seeking, beta generation, downside protection,
liability management and income management.2
In the future, the investor will
be the benchmark.
To meet these challenges, the industry will need a keen understanding of the
role of local intelligence in decision-making systems. It will need to streamline the
delivery model at both industry and organizational levels to eliminate complexity
and bring strategic priorities in line with what investors want most: personal
performance. And finally, it will need to define a formula for sustainable returns
to account for investors’ unique performance goals, to align fees with value
delivered and to be fully transparent so the investor can appreciate that value.

STUDY METHODOLOGY
Primary research
This study is based on input from more than 3,300
investment management industry participants across
68 countries. The Center for Applied Research obtained
this input through surveys of 2,725 investors, and 403
investment providers and government officials. Surveys
were conducted through an online platform in collabo-
ration with the Economist Intelligence Unit, Scorpio
Partnership and TNS Finance Amsterdam. In addition,
we conducted face-to-face interviews with 200 execu-
tives and government officials from around the world to
gain qualitative insights for our research.
Our analysis focused on selected investment community
members representing a wide range of perspectives:
Institutional investors — Defined contribution/defined
benefit plans, sovereign wealth funds, insurances,
central banks, family offices and others
Retail investors — Mass basic, mass affluent and
high-net-worth individuals
Asset managers — Traditional and alternative asset
managers whose clients are institutional, retail or both
Intermediaries — Consulting firms and financial
advisors
Regulatory bodies and government officials
Others — Academics, think tanks and industry
associations
Geographical breakdown
A wide range of geographies were included.
Retail: 14 countries were selected for participation:
03 in the Americas, 7 in EMEA and 4 in APAC
Institutional: 37 percent of respondents were from
the Americas, 33 percent from EMEA and 30 percent
from APAC, respondents represented 68 countries
Secondary research
We conducted secondary research and developed
quantitative models, including:
Country analysis of economic growth and political
stability
Asset allocation patterns
Analysis of alpha production
Analysis of fee compression levels
Trust indices
Percentages and weightings
All percentages are rounded.
Charts displaying investors’ view
“Overall” results are equally weighted to give retail and
institutional investors an equal voice
Within the retail investor results, views of mass basic,
mass affluent and high-net-worth have also been
equally weighted
Charts displaying providers’ view
“Overall” results are equally weighted to give interme-
diaries and asset managers an equal voice
Charts displaying industry views
“Overall” results are equally weighted among categories
to give industry participants an equal voice
Where regulatory bodies did not respond to the ques-
tion asked, the “overall” results shown are equally
weighted between the provider and the investor view

PART I
How is investor behavior changing?
The future of the investment management industry will be determined by the
actions that investors take — healthy or unhealthy, rational or irrational, self-
interested or self-destructive. To be successful in the future, the industry must
understand why investors behave the way they do.
What we found was surprising: Investors do not seem to be acting in their own
best interest. While not always true, and not for every investor, there is ample
aggregate evidence of this behavior. On the retail side, investor behavior is not
aligned with their long-term goals. While on the institutional side, investors do
not believe they are prepared to handle the risks associated with their actions.
Retail investors: Do as I say, not as I do
When we asked retail investors what steps they need to take over the next 10
years in order to be prepared for retirement, the No. 1 response (40 percent) was
to become “more aggressive.” (See Figure 1.) However, when we analyzed their
asset allocations, we found that cash was the No. 1 allocation, and the amount of
the allocation was significant — an average of 31 percent. Asked to project their
allocation 10 years from now, cash was still the dominant asset class. (See Figure
2.) At the same time, the largest growth is expected to be in fixed income. Given
investors’ stated need to be more aggressive, the preference for cash, combined
with a movement toward fixed income, seems out of sync with the long-term goal
of becoming more aggressive.
FIGURE 1.
Retail investors claim they will need to be “more aggressive” over the next 10
years to prepare for retirement.
Financial Steps for Retirement (Percentage of Survey Respondents)
INVESTORSARE
NOTACTING
INTHEIROWN
BESTINTEREST.
n= 2,623
Note: Percentage of survey respondents by category when asked: Which financial steps are you
taking to prepare for or during retirement in the next 10 years, if any? Please select one. Source:
Center for Applied Research analysis.
23%
Not planning to take
new financial steps
6%
Don’t know
29%
More conservative
2%
Other reason
40%
More aggressive

FIGURE 2.
Despite the recognition that they need to be “more aggressive,” retail investors
are heavily invested in cash — and plan to stay that way for the next 10 years.
Asset Allocation - Retail Investors (Percentage Allocation by Asset Class, Rank Ordered by Total)
Such conservative behavior may not be all that surprising and may even be
justifiable, given the volatility in global markets and the large pre-retirement
population. However, what is surprising — and worrisome — is the high level
of asset allocation convergence across all demographics. For example, when
we analyzed investor behavior by age group, we found that cash was the
No. 1 allocation across all groups, both now and 10 years from now. Similarly,
the increase in projected future allocation to fixed income did not change signifi-
cantly between age groups.3
Now
10 years
7%
6%
7%
6%
16%
16%
30%
31%
20%
23%
17%
20%
Cash
Equity
Fixed income
Alternatives (HF, PE, RE)
Commodities
Inflation protection
“RETAILINVESTORSAREOUTCOME-ORIENTED.
WHENTHEOUTCOMEISNOTPREDICTABLE,
THEYJUSTGOTOWHATIS.”
—US retail asset manager
n= 2,623
Note: Percentage allocation by asset class when asked: In which asset classes are you currently/
do you plan to be invested in? Please indicate in percentage (total should be 100 percent). Source:

While there is nothing wrong with cash, it is at odds with investors’ stated need
to become more aggressive. What is driving this behavior? As a one US-based
retail asset manager observed: “Retail investors are outcome-oriented. When the
outcome is not predictable, they just go to what is.”
Institutional investors: Aggressive moves, potential for unintended consequences
While we’re seeing conservative behavior on the retail side, institutional investors
are moving into more complex asset classes. Independent of type and despite
divergent goals, institutional investors have been consistently increasing their
allocation to alternative investments over the last decade.4
And, based on a
recent State Street survey, this trend is likely to continue.5
In the United States, for example, 45 percent of survey respondents said the
low-yield market environment had increased their appetite for alternative strate-
gies. When asked about asset allocation changes, 56 percent are looking to the
private markets, including private real estate, private equity and infrastructure.6
European pensions, SWFs and Asian central banks also expect to increase their
allocations to alternatives. Alternative assets offer many benefits, including diver-
sification, high alpha potential and the possibility of risk reduction. On its face,
the convergence of institutional investors into these asset classes seems healthy.
As we dug deeper, however, we uncovered a troubling finding: Based on our
investor interviews and survey work, we found that institutional investors aren’t
fully prepared to handle the complexity that comes with alternative assets. When
we asked them to describe their largest challenges, “Complexity stemming from
increased investments to alternatives” ranked No. 1. (See Figure 3.) Investors
also see “having a deep understanding of potential risks” as the largest area of
weakness in their talent pool.7
By increasing allocations to alternatives, despite concerns that they aren’t
prepared for the ensuing complexity, it seems that many institutional investors
aren’t acting in their own best interest either.
As one Canadian pension plan told us:
“ITHASTAKENUSOVERADECADETOBUILDTHEAPPROPRIATERISK
INFRASTRUCTURETOHANDLECOMPLEXASSETCLASSES.
I’MAFRAIDTHATMANYINSTITUTIONALINVESTORSAREHERDINGINTO
ALTERNATIVEASSETCLASSESWITHOUTLAYINGTHEFOUNDATION.
THISISNOTGOINGTOENDWELL.”

FIGURE 3.
While institutional investors’ appetite for alternative investments shows no sign of
abating, the complexity of those assets poses investors’ largest challenge.
Challenges for Institutional Investors (Percentage of Survey Respondents, Rank Ordered by
Significant Challenge)
n= 130
Note: Question asked: For each of the following, please indicate the extent to which it poses a
challenge for your organization. Source: State Street 2012 Asset Owner Study.
Signiﬁcant challenge
Slight challenge
Not a challenge
N/A for my organization
14%
36%
40%
9%
16%
35%
36%
13%
5%
19%
63%
13%
6%
27%
53%
14%
10%
22%
37%
31%
18%
55%
22%
6%
Complexity stemming from increased investment in alternatives
16%
33%
33%
19%
Demands from regulators, ratings agencies
Demands from trustees, regents, and/or donors
Proliferation of investment data sources
Demands from internal governance/risk management functions
Inability of our IT systems to handle current data needs
Demands from beneﬁciaries/plan participants

PART II
What is driving investor behavior?
A rational response to instability
What would drive retail investors, young and old, the ultra-wealthy and those of
modest means, to flock to cash when they know they must be more aggressive
in order to prepare for retirement?
Why would institutional investors around the world continue to allocate more to
alternative assets when the complexity stemming from the asset class is their
No. 1 challenge, and they don’t believe their staff has a deep understanding of
the risk?
We wanted to understand the drivers behind these behaviors. What we found
was they have been largely shaped by investors’ growing awareness of the
financial system’s instability. Although it may seem counterintuitive, investors’
seemingly irrational behavior is a rational response to the environment.
Awareness of economic trends
Two factors are converging to drive this heightened awareness of instability:
worldwide central bank interventions, and increasing levels of global correlations
and systemic risk.
Central banks around the world have instituted sizable quantitative easing
measures over the last decade. The Bank of Japan launched their first quantita-
tive easing program in 2001; in September 2012, it began its eighth round of
easing to bring total assets purchases to ¥80 trillion. The European Central Bank
handed out another €529.5 billion in loans to the region’s struggling banks in
February 2012 to take the easing program past €1 trillion. In September 2012,
the US Federal Reserve Bank announced its third round of easing, QE3, on top
of $2.3 trillion already injected into the economy and committed to an additional
$40 billion per month thereafter. Also, in July 2012, the United Kingdom’s
Bank of England announced the purchase of a further £50 billion to bring total
assets purchases to £375 billion — a number expected to rise to £425 billion by
November.8
In the months prior to QE3 in the US (Sep 2012), there has been a
synchronized government stimulus which amounted to more than 33 rate cuts
from around the globe. (See figure 4)

Note: The visualization represents the total of the central bank interest rate cuts by country that
have taken place in 2012 (YTD November 7, 2012). Source: Center of Applied Research analysis;
Central Bank Rates; Global Rates.
At the same time, there is growing awareness — and worry — about increasing
levels of global correlation and systemic risk. We measured global correlations
among the weekly returns of 19 MSCI National Indices from 1996–2011 and
found that the global markets are indeed becoming increasingly correlated. Even
across asset classes, historical relationships are not static, and that makes diver-
siﬁcation a very complex process — one that can lead to unintended results. For
example, the traditionally negative correlation between commodities and equities
reversed sharply in 2008, as a result of deleveraging and demand loss.10
In a related analysis, State Street Associates, State Street’s partnership of
industry and academia, developed a systemic risk index11
that measures the
fragility of equity markets, and it showed that systemic risk has also been rising
over the last 15 years. (See Figure 5.)
Central bank interventions, combined with the uncertainty associated with
increasing global correlations — across markets and asset classes — and rising
systemic risk are driving market instability. Investors’ are increasingly aware of
this instability and, faced with a changing landscape, are responding to it with
behaviors that are in conﬂict with their long-term objectives.
South
Africa
Lebanon
China
-0.56%
India
-0.50%
Denmark
-0.50%
Isreal
-0.75%
Australia
-1.00%
Pakistan
-2.00%
Philippines
-0.75%
Uganda
-10.5%
South
Africa
-0.50%
Russia
0.25%
Romania
-0.75%
Kenya
-7.00%
Sweden
-0.50%
Nambia
-0.50%
Chile
-0.25%
Czech
Republic
-0.25%
Brazil
-3.75%
Belarus
-13.00%
Kazakhstan
-2.00%
South
Korea
-0.50%
Latvia
-1.00%
Indonesia
-0.25%
Ukraine
-0.25%
Hungary
-0.25%
FIGURE 4.9
Central Bank Interest Rate Cuts in 2012

FIGURE 5.
Correlations and systemic risk are increasing — and increasingly visible
to investors.
Global Equity Markets Correlations and Systemic Risk Index, 1996–2011
Note: The Systemic Risk Index was developed by State Street. It measures the fragility of
equity markets and susceptibility to drawdowns. Global correlation refers to the correlation
between weekly returns of 19 MSCI National Indices from 1996 to 2011. The y-axis shows
the values of the Systemic Risk Index and global correlations, which can range between
0 and 1. The x-axis shows the measurement period from December 1996 to December 2011.
Source: Center for Applied Research analysis; State Street Associates.
Misaligned interests
In addition to economic factors, investors are becoming increasingly aware of
a series of deeply misaligned interests. When we looked across the investment
ecosystem, we found that industry participants are creating barriers to healthy
decision-making when they should be acting as facilitators.
Systemic Risk Index
Global correlation
1.0
0.8
0.6
0.4
12/96 12/97 12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11

Mistrust abounds
We considered four segments of the investment community — investors,
providers, regulators and a broad category that we call “markets.” The results
offer compelling evidence that mistrust abounds among stakeholders and repre-
sents the largest barrier to healthy decision making.
Only one-third of retail and institutional investors believed their primary invest-
ment provider is acting in their best interest.12
Investors reported that they do
not receive sufficient financial education from their advisors — not surprising,
given that a recent global literacy survey found that not one out of 28 countries
received a passing grade.13
Regulation and politics were cited as the top two external impediments
to institutional investment decisions.15
When we asked investors for their
views on regulatory effectiveness and cost, 64 percent said they believe
that regulation won’t help address current problems.16
Adding insult to
injury, the majority also believes that the costs will be passed on to
them. Responding to the same set of questions, the majority of regulators
agreed. Fifty-five percent of regulators believe regulation won’t help address
current problems, and 64 percent believe the cost will be passed on to investors.17
65%OFINVESTORSARENOTPARTICULARLYLOYAL
TOTHEIRPRIMARYINVESTMENTPROVIDER.14
Provider 1 Provider 2

Skepticism about markets
We also tested how participants viewed the markets themselves. Retail investors
cited “skepticism of markets” as the No. 1 obstacle to becoming more involved in their
finances.18
Their concern is well-founded as the US Federal Trade Commission’s
Consumer Sentinel Network Data Book has documented a 62 percent increase
in financial fraud claims, among other types, in the last three years. Moreover, in
2011 there were abounds 1.5 million individual claims.19
On the institutional side,
a global survey of the CFA Institute’s membership of regulators showed “market
fraud” as one of the most important ethical issues facing global markets.20
From the WorldCom scandal in 2002 to the Madoff Ponzi scheme in 2008 and
the manipulation of the interest rate benchmark LIBOR, the global financial press
has been full of stories of market fraud, scams and schemes. Add to that the
2008–2009 financial crisis, in which complex US mortgage-backed securities
and underwriting practices played a crucial role, and it is no wonder investors and
providers alike are questioning whether the markets are working for or against them.
THREE DIMENSIONS OF MISALIGNMENT
When we looked deeper at this pervasive misalignment among industry partici-
pants, it became apparent that it exists across three primary dimensions: time,
financial interest and knowledge. Each dimension contributes to our under-
standing of how the investment community is creating barriers to healthy
decision making.
Time: Short-term versus long-term focus
The tendency to focus on the short term is a human characteristic. Behavioral
economists refer to it as hyperbolic discounting — “a way of accounting in a
model for the difference in the preferences an agent has over consumption now
versus consumption in the future.”21
Put another way, instant gratification often
trumps a future — and potentially greater — reward.
The friction between short- and long-term interests is nothing new in the
industry. We are all too aware of how earnings pressure can sabotage long-term
strategic initiatives. In a survey of financial executives, 80 percent reported that
they would decrease discretionary spending on research and development,
advertising and maintenance; 55 percent said they would delay starting a new
project to meet an earnings target — even if such a delay entailed a sacrifice
in value.22
The focus on short-term rewards goes beyond the way the industry
manages its business; it increasingly defines how we invest. Between 1945 and
1965, the average fund held a typical stock for about six years. By 2005, the
holding period had compressed to 11 months.23
INDUSTRYPARTICIPANTS
ARECREATING
BARRIERSTOHEALTHY
DECISION-MAKING
WHENTHEYSHOULDBE
ACTINGAS FACILITATORS.
INVESTOR GOALS

Why, then, does our study find that 64 percent of survey participants “some-
what” to “strongly” agree with the following statement: “Long-term decisions
are important to me”?24
Certainly a focus on the long term would be in the best
interest of investors and providers, but the behavioral evidence suggests that
short-termism is much more prevalent. This misalignment of interests — and
self-perception — is one factor that is driving unhealthy decision-making.
Financial interest: Opacity versus transparency
The second dimension of misalignment is financial interest — specifically with
respect to the transparency of fees versus the value that is delivered. Opacity
and the lack of delivered value relative to fees is the cornerstone of the mistrust
investors harbor toward providers. Our research showed that 46 percent of
institutional investors believe the fees they pay are not commensurate with the
value that is delivered.25
And there is ample evidence for the reason: There are
only a handful of managers that have consistently outperformed their respec-
tive benchmarks. For example, in a recent study, “Measuring Luck in Estimated
Alphas”, [Also: The full title of the study is “False Discoveries in Mutual Fund
Performance: Measuring Luck in Estimated Alphas”] Barras, Scaillet and
Wermers conducted an analysis of US actively managed open-ended domestic
equity mutual funds that existed between 1975 and 2006. The authors found
that after risk adjustment, well under 1 percent of funds achieve superior results
after costs.26
Misalignment of financial interest is another barrier to healthy deci-
sion making.
While a flurry of new regulatory initiatives — Dodd-Frank, MiFID II and RDR,
to name a few — attempt to address issues around fee transparency, fiduciary
standards and unbundling investment advice from commissions, it remains to be
seen whether they will be effective. And although investment providers may not
relish the thought of regulatory oversight, transparency ranked No. 2 among the
areas most likely to be affected by regulation. (See Figure 6.) While well-inten-
tioned, these regulatory initiatives may not produce appropriate transparency
— digestible forms of information that investors need.
20x
TALLER
THEGROWINGPAPERTRAILFORMEDBYTHEDODD-FRANKLAW
IS20TIMESTALLERTHANTHESTATUEOFLIBERTY.27

FIGURE 6.
Increased transparency will have a signiﬁcant effect on the industry — but whether
transparency translates into usable information for investors remains to be seen.
Largest Areas of Regulatory Impact (Percentage of Survey Respondents, Rank Ordered by Total)
Overall
Asset manager
Institutional investor
Intermediary
Regulatory institution
34%
22%
29%
17%
26%
Increased capital and liquidity
20%
23%
24%
22%
22%
Increased transparency and reporting requirements
16%
13%
9%
12%
13%
Forced restructuring of activities/business model
12%
17%
19%
13%
New forms of taxation
10%
13%
5%
14%
7%
Changes in sales practices
8%
14%
4%
10%
6%
Changes in global derivative markets
2%
9%
6%
7%
6%
Compensation/incentive scheme changes
2%
1%
1%
5%
Don’t know
1%
1%
2%
2%
Other, please specify
2%
1%
1%
Not applicable
n= 505
Note: Question asked: Which of the following areas of regulatory focus do you expect will have the most
profound effect on your firm/investment management industry over the next 10 years? Source: Center
for Applied Research analysis.

Knowledge: We don’t know what we don’t know
The third dimension of misaligned interest concerns knowledge and the role
unrealistic expectations may play in investor self-awareness. We surveyed for self-
perceived levels of financial knowledge across all classes of retail and institutional
investors — and we found an abundance of confidence. Nearly two-thirds of retail
investors believed their current level of financial sophistication was advanced. The
numbers are even higher for institutional investors. (See Figure 7.)
FIGURE 7.
The majority of investors see themselves as financially sophisticated.
Financial Sophistication: Now and in 10 years (Percentage of Survey Respondents)
n= 2,724
Note: Question asked: How would you describe your behavior in the following categories: now and
in 10 years? My level of financial sophistication is very low/my level of financial sophistication is very
advanced. Please rate each statement: somewhat agree, agree or strongly agree. Source: Center
for Applied Research analysis.
Don’t know Strongly agree
Agree
Somewhat agree
Somewhat agree
advancedbasic
0% 35% 40% 20% 0% 20% 40% 60% 80% 100%
In 10 years
Today
level of financial sophistication
Overall
High net worth
Mass affluent
Mass basic
Agree
Strongly agree

Are these self-assessments accurate or are investors overly optimistic about their
level of sophistication? Overconfidence is, after all, a human trait — and there is
no shortage of overconfidence in the investment community. A UK-based behav-
ioral finance strategist James Montier found that almost 100 percent of fund
managers globally believed that their job performance was “average or better,”
when clearly only 50 percent can be above average.28
Exacerbating this overconfidence effect is the equally human tendency to set
unrealistic expectations. For example, the median assumed rate of return for US
public defined benefit plans is 7.9 percent — despite the fact that actual median
return was only 3.2 percent for the last five years, and 6.0 percent for the last 10
years.29
Many of these assumed rates were set years ago, and there is political
resistance to change despite changes in the economic environment. Varying
levels of actual knowledge versus perceived knowledge, combined with unreal-
istic expectations, are creating sizeable barriers to healthy decision making.

PART III
Is the industry delivering value?
Clearly, the industry is facing sizable challenges. Increasingly aware of the instability
of the global financial systems, many investors aren’t acting in their own best
interest; some are exhibiting behavior that is at odds with their stated objec-
tives. There is a significant misalignment of interests across different classes of
industry participants, and most investors are overconfident about their level of
financial sophistication. Against this shifting backdrop, we wanted to understand
whether the industry was delivering on its value proposition — and whether that
value proposition would be sustainable in the future.
Rethinking the value proposition
We began by trying to understand how investors define value. We asked retail
and institutional investors which provider capabilities would become increasingly
important to them over the next 10 years. Performance was the overwhelming
choice; respondents ranked it as No. 1. (See Figure 8a.)
FIGURE 8A.
Performance will be the No. 1 driver of investors’ perception of value in the
next decade.
Most Important Value Drivers (Percentage of Survey Respondents, Rank Ordered by Total)
40%
28%
25%
25%
21%
21%
18%
18%
15%
12%
11%
9%
Performance
Unbiased high-quality advice
Client service excellence
Transparency
Reputation and integrity
Best-in-class offerings
Alignment of incentives
Tailored solutions
Convenience
Global footprint
CSR and green factors
One-stop-shop offering
n= 2,724
Note: Question asked: Which of the following capabilities will become increasingly
important to you over the next 10 years? Respondents include institutional and
retail investors. Source: Center for Applied Research analysis.

We then examined whether investors thought their providers were delivering on
the values they cared most about. We asked the same group to identify providers’
greatest weakness. Once again, performance was No. 1. (See Figure 8b.)
FIGURE 8B.
While performance is what investors value most, it is also seen as the weakest
link in their providers’ value proposition.
Largest Weaknesses of Investment Providers (Percentage of Survey Respondents, Rank
Ordered by Total)
n= 2,724
Note: Question asked: Based on your investment providers’ current capabilities, which of the
following areas represent the largest weaknesses? Respondents include institutional and retail
investors. Source: Center for Applied Research analysis.
Performance is in the eye of the beholder
So, while performance is what investors value most, it is also seen as the weakest
link in their providers’ value proposition. Surely the industry has not intention-
ally failed to deliver value through performance. What is more likely: Asset
managers and providers do not fully understand what investors mean by “value”
and “performance.”
The deﬁnition of “performance” is shifting. Our research shows that institutional
investors and intermediaries are planning a strategic move away from benchmarking
— and toward an absolute return model — over the next 10 years. (See Figure 9a).0 15 30 45 60
24%
21%
20%
19%
17%
17%
16%
16%
15%
15%
11%
8%
24%
21%
20%
19%
17%
17%
16%
16%
15%
15%
11%
8%
Performance
Transparency
Unbiased high-quality advice
Tailored solution
CSR and green factors
Client service excellence
Global footprint
Alignment of incentives
One-stop-shop offering
Best-in-class offerings
Convenience
Reputation and integrity

FIGURE 9A.
Investors are moving away from benchmarking as a measure of success —
and failure.
Top Strategic Model Preference: Absolute Returns (Percentage of Survey Respondents,
Rank Ordered by Total)
n= 202
Note: Question asked: What changes do you expect to make to your strategic model and investment
strategy? Please select one. Source: Center for Applied Research analysis.
Overall
Intermediary
0.000000 9.166670 18.333340 27.500010 36.666679 45.833349
44%
40%
36%
30%
31%
32%
15%
17%
19%
12%
12%
My focus will be more towards absolute return away from benchmarking
My focus will be more on beating the benchmark
My focus will be more on replicating the benchmark
Not applicable
12%
As one European-based executive from a fund manager told us:
“THEREISANAGENTVERSUSPRINCIPALPROBLEMINOURINDUSTRY.
THEBESTMEASUREIHAVECOMEACROSSOFMEASURINGAPROVIDERWOULD
BETOLOOKATHISORHEROVERALLPERFORMANCEANDTHENCOMPARE
THATTOWHATWOULD HAVEHAPPENEDIFHEORSHEHADGONEONHOLIDAY
FORTHEPERIODANDLEFTFLOWSTOBEALLOCATEDPARI-PASSUTOTHE
ORIGINALPORTFOLIOATTHEBEGINNINGOFTHEPERIOD.THISWILLGIVEA
TRUEMEASUREOFTHEONEASPECTOFPORTFOLIOMANAGEMENTNEVER
MEASURED,BUTYET[IS]AHUGECOMPONENTOFPERFORMANCE:
INVESTMENTTIMINGANDFRICTIONCOSTS—INSHORT,THEREALVALUEADDED.”
PERFORMANCE,ITSEEMS,
ISINTHEEYEOFTHEBEHOLDER.

PART IV
Where do we go from here?
How will the industry measure success — and failure — in the future? How
can we incorporate this concept of the “influential investor” into new models for
sustainable returns?
Benchmark and peer-group performance has been institutionalized over many
decades; our existing delivery models are built around it. But the evidence for
change — “unhealthy” investor behaviors, a growing awareness of economic
instability, misaligned interests across the investment community — is compel-
ling. Moving away from the current model won’t be easy, nor will it be a panacea,
but it would be one step forward.
All performance is personal
If the industry is to generate returns in the future, the most important word in our
investment management vocabulary — performance — must be redefined. The
industry’s value proposition must evolve to one that frames performance in terms of
the investors’ objectives — what we call “personal” performance — and makes
that value fully transparent to the investor.
From the investor’s perspective, of course, all performance is personal.
Discerning investors are looking for value across four components: alpha
seeking/beta generation, downside protection, liability management and income
management. We think of these components as analogous to an income state-
ment and a balance sheet, with assets that must be grown or protected, and
liabilities that must be managed. How an individual investor’s objectives align
with each of these components is highly personal.
What would an investor-defined benchmark look like? We created a four-compo-
nent performance model in which key value drivers become the building blocks
for “personal” solution. (See Figure 9b.) Two components — alpha seeking/
beta generation and downside protection — are related to market forces and
are common to most investors. The last two components — liability manage-
ment and income management — are risk exposures that are unique to each
investor. In this model, the four components become building blocks from which
organizations can create a solution that is personalized to meet investors’ needs
and objectives.

FIGURE 9B.
These four components of value — from the investors’ perspective —
will be the building blocks of “personal” performance.
Source: EDHEC, “Asset-Liability Management Decisions for Sovereign Wealth Funds” (2010);
Many investors continue to look for alpha — and they are willing to pay for it; if
it’s delivered — and beta generation is an important component depending on
the level of asset class or geographic efficiency. Downside protection is becoming
increasingly important given growing concerns about market volatility. But the
other two components are not universally important to all investors. To illustrate
how these components play out among different classes of investors, we offer a
few examples.
EXAMPLE 1: OIL-FUNDED SOVEREIGN WEALTH FUNDS
While alpha seeking is a key objective if the fund wants to add return, the
income-management component could be customized to address the risk expo-
sure from the oil endowments. Short positions in oil commodity futures or long
positions in companies that benefit from a decrease in oil prices, such as airlines,
would fulfill this objective. The SWF could also hedge against — or exploit —
inflation and interest rate volatility within the liability-management component of
its personalized performance framework.30
MARKET
COMPONENTS
INVESTOR
COMPONENTS
alpha
seeking
beta
generation
downside
protection
income
management
liability
management

EXAMPLE 2: A PENSION FUND
A pension fund might find all four components attractive. Alpha/beta genera-
tion is important to meet the fund’s assumed rates of return — or to exceed
it if there is a funding gap. Downside protection can also play a critical role,
given the importance of minimizing asset loss and reducing funding ratio
volatility. Liability management is necessary to match future liabilities with
assets. Finally, even income management may be important to diversify away
from business risks from the plan sponsor that could affect its ability to
make contributions.
EXAMPLE 3: AN INDIVIDUAL INVESTOR
For a private investor, alpha/beta generation will likely be a fundamental compo-
nent of value. Since most individuals would like some downside protection,
potential losses could be minimized by defining and managing to an acceptable
risk target. But some may also want liability management to help align their goals
with their retirement income needs and current investments, such as house or
family support. Finally, income management would decrease exposure to the
investor’s primary source of income. For some, that might mean diversifying
away from their legacy assets or company stock. For others, it could be avoiding
stocks in their employer’s industry group and investing in non-correlated indus-
tries and asset classes.
It is clear that, with respect to performance, one size does not fit all. Within this
new, more granular definition of “performance,” the investor is the benchmark.
The road ahead
Change presents new opportunities for the industry. But capitalizing on them
won’t be easy. There are a few barriers to delivering more personal performance,
not the least of which is an institutionalized reliance on outdated constructs. The
current system has been built around a concept of performance that is defined
relative to market indices, consulting quadrants, Morningstar-style boxes, rock-
star stock pickers and research analysts. The investor doesn’t usually figure into
the equation — but this is changing.
WITHINTHISNEW,
MOREGRANULAR
DEFINITIONOF
PERFORMANCE,
THEINVESTORIS
THEBENCHMARK.

Investors themselves are also a barrier. Any new definition of performance will
require a much deeper understanding of investors, their unique decision-making
systems and the components of performance that are relevant to them.31
Concept
of decision-making systems. Each of these areas will warrant more research and
innovation vigor around decision-making and behavioral economics. Those who
choose to ignore these factors for much longer will find themselves struggling to
keep up.
To ensure this new definition of performance is economically viable, it will become
increasingly important to scale investment management while addressing
capacity constraints. Supporting systems and processes will be paramount in
driving down costs.
Our analysis looked at several of these factors and how they are affecting
the industry.
Decision-making requires local intelligence
There is often a mismatch between economic forecasts and the socio-polit-
ical realities in a given country. Investor behavior is only partly explained by
the economic conditions of a country. To fully understand the drivers of investor
behavior, firms must develop deep local intelligence in addition to macro-
level forecasts.
We analyzed Liquid Financial Wealth Economic Growth Projections for 2012–
2020 and compared them to an index of socio-political variables, such as the
level of corruption and political stability, for 29 countries. As you can see in
Figure 10, there are significant mismatches between the predicted outcomes
from the two sources. Take Russia, for example. While LFW projections are
aggressively bullish, the socio-political conditions are anemic and put Russia at
the bottom of the list.
There is an obvious disconnect between economic and socio-political projec-
tions, and there is much about individual- versus country-level decision-making
that we do not understand. These decision systems affect investor behavior,
both in terms of physical constraints, such as closed markets, and emotional
constraints, such as skeptical cultures. The industry needs to be more aware of
how these systems operate at the local level.

FIGURE 10.
Social and political decision systems affect investor behavior. There is a mismatch
between economic forecasts and a country’s social and political realities.
Economic Versus Socio-Political Realities
Note: 1
The overall socio-political indicator growth index is based on seven different non-economic
parameters: 1) Size of labor force; 2) Level of corruption; 3) Level of protectionism; 4) Level of
indebtedness; 5) Internal stability; 6) Political stability; and 7) Infrastructure; 2
the original country
growth projections in percentages were normalized to a scale of 1–10.
Source: The Crumpton Group; Crumpton Group LLC is a strategic international advisory and busi-
ness development firm, consisting of former agents from the Clandestine Service of the Central
Intelligence Agency, government officials and investment management professionals. Center for
Applied Research analysis.
STREAMLINE DELIVERY
Another barrier to redeﬁning performance as “personal” is the industry’s
outdated delivery model. At both the industry and organizational levels, conven-
tional systems are challenged by complexity.
Circle size weighted by LFW (2011)
Prominent mismatches
0
2
4
6
8
10
2 4 6 8 10
Norway
Switzerland
Chile
South Korea
Canada
US
FranceMalaysia
Spain
Brazil
China
Indonesia
Turkey
Saudi Arabia
Argentina
India
Russia
Austria
Poland
Australia
Germany
Mexico
Ukraine
Italy
Denmark
UKJapan
Netherlands Sweden
Liquid Financial Wealth (LFW) Economic Indexed Growth Projections, 2012–2020
Socio-Political Indicator Growth Index1

Industry model: More is not better
The industry’s product delivery model offers a mind-numbing array of choices to
investors. Consider this: There are 73,343 funds32
worldwide delivered through more
than 810,000 banks.33
In Europe alone, there are more than 3,100 asset managers.34
According to a 2012 MFS Investing Sentiment Survey, 40 percent of investors
think investment products are “overly complex,” and 34 percent feel “over-
whelmed” by the investment choices available to them.35
Is it any wonder that
retail investors find comfort in cash?36
Psychologist Barry Schwartz has demonstrated that too much choice leads to
reduced happiness and a feeling of missed opportunities. “At this point,” he
writes in The Paradox of Choice, “choice no longer liberates, but debilitates. It
might even be said to tyrannize.”37
Put another way, “the fact that some choice
is good doesn’t necessarily mean that more choice is better.”38
Are investors immune from the paradox of choice? Apparently not. Research
from a behavioral finance study shows that participation rates in voluntary retire-
ment plans decrease between 1.5 and 2.0 percentage points per every additional
10 mutual funds offered.39
Investment providers who cite “new product devel-
opment” as their No. 1 strategic priority in the next decade might want to be
particularly vigilant about rationalizing existing offerings and aligning new offer-
ings with investors’ perception of value.40
“TOOMUCHCHOICEIS
DEMOTIVATING,”
concluded Sheena Sethi-Iyengar
of Columbia University and
Mark Lepper of Stanford.
As options proliferate, there is
a point where the effort needed
to distinguish between alterna-
tives may outweigh the benefits.
At that point, most consumers
just give up.
Investors in a jam: When is enough, enough?
The paralyzing effect of too many choices became clear when researchers conducted
an experiment in a California grocery store. They set up a sampling table with a display
of jams. In the first test, they offered 24 different jams to taste; on a different day they
displayed just six. Here’s what happened:41
Test #1 / 24 jams
More shoppers stopped at the display, but…
3% of those who stopped
at the 24-jam table
made a purchase.
Test #2 / 6 jams
Fewer shoppers stopped, but…
30% of those who stopped
at the six-jam table
eventually purchased a pot.
THEREARE73,343FUNDS
WORLDWIDEDELIVERED
THROUGHMORETHAN810,000
BANKS.33
INEUROPEALONE,
THEREAREMORETHAN3,100
ASSETMANAGERS.
32
34

Organizational model: The complexity tax
Organizations can be complex — and that complexity can harbor costly ineffi-
ciencies. Organizations must find a way to streamline processes and systems so
that resources are deployed in service of delivering value to investors.
The industry dynamics are changing at a rapid pace. As a result, the issue
of complexity has broadened from an operational focus to one that affects
long-term strategic priorities. With rapidly evolving conditions — the flurry of
regulatory changes, for example — it doesn’t take long for an organization’s
infrastructure and processes to become obsolete. Integrating legacy systems
with newer structures makes managing business priorities and organizational
complexity a fine line to walk.
We wanted to quantify the business impact of this organizational complexity.
We spoke with more than 30 key industry executives — all asset managers or
asset owners — and asked them to identify the largest areas of value destruc-
tion in their organization. Core business processes, business support systems,
data management and talent management were the most common incubators of
inefficiencies. (See Figure 11.) Beyond the issues of cost, complexity is a tax on
organizations and is getting in the way of delivering value.
FIGURE 11.
Complexity is a tax on investment organizations and impairs their ability to
deliver value to investors.
Organizational Complexity, 2012 (Business Impact per Category, in Percentage)1
Note: 1
Based on interviews with asset owners and asset managers; Each category was determined
based on more than 30 interviews, within which we asked, Which are the largest areas of value add
versus value destruction for clients? with open-ended responses. 2,3
Inefficient core and business
support processes represent operational costs associated with duplication of people, processes
and technology across core and support business functions, e.g., processing derivatives represents
operational costs associated with manual intervention; 4
Data management represents inefficient
market and reference data management; 5
Talent management represents inefficient use of skill
sets and geographic locations
Source: Primary interviews; Center for Applied Research analysis.
ORGANIZATIONSMUST
FINDAWAYTO
DEPLOYRESOURCES
INSERVICEOF
DELIVERINGVALUE
TOINVESTORS.
25–30%
Inefficient core
business processes2
Inefficient business
support system3
Inefficient data
management4
Inefficient talent
management5
Others
20–25% 15–20% 10–15% 5–10%
Total complexity impact
100%

Rising costs and cognitive biases
At a fundamental level, this complexity is driven by two factors — the rising cost of
processed information and the cognitive biases of the human mind. It might seem
counterintuitive to state that information costs are rising, when technology has
become more accessible. But while the cost of raw information has decreased,
the sheer volume of data makes distilling relevant and actionable information from
that data a daunting and expensive task. To put this into perspective, consider
that 2.5 quintillion bytes of data are created every day — and 90 percent of the
data in the world today has been created in the last two years.42
When decision-makers are faced with copious amounts of ambiguous data —
and a finite amount of time to consider it in — they make decisions that are
satisfactory, but not necessarily optimal. Behavioral economists refer to this
phenomenon as “bounded rationality.”43
Optimal decision-making requires ongoing and comprehensive planning, where
each interconnection and every process is carefully understood and designed
to ensure streamlined operations. To flourish in such a complex environment,
investment management organizations must have a “kaizen” — a Japanese
concept meaning “continuous improvement” — mindset toward streamlining
their organizational models.
A new model for success
In the future, we believe that success will be defined in terms of the sustain-
ability of returns relative to the investor. Truly sustainable returns — those that
meet investors’ individual goals — must start with a deep understanding of
the value components that are meaningful to the investor. But in order for the
investor to fully appreciate — and be willing to pay for — those returns, the value
components delivered and the fees charged must be transparent. Over time, this
new model for success will help to improve the alignment of interests across all
industry participants, provide incentives for streamlining delivery models and
reduce barriers to healthy decision-making.
A new formula for sustainable returns Where:
Sustainable returns refers to a condition that
allows for a long-term risk and return target;
F = Personal value, where personal value is
a function of the four components of value:
alpha and beta generation, downside
protection, liability management, and
income management
T = Transparency of sustainable returns,
personal value and fees.
= Fx TSUSTAINABLE
RETURNS
Source: Center for Applied Research.
“THESTRUCTUREOFTHE
INDUSTRYANDTHECULTURE
OFITSLEADERSAREBUILT
ONANEXPERIENCEWHICHIS
UNIQUEINHISTORYANDALMOST
CERTAINLYUNREPEATABLE.
THEQUESTIONIS,DOWEHAVE
ENOUGHCOURAGETOCHANGE?”
—US-based asset manager

SUMMARY
At the beginning of our study, we asked: What are the forces that will shape the future
of the investment management industry over the next decade?
The simple answer is the investors themselves — their behavior, the factors that
influence their behavior, and their personal definition of value. Our research
has shown that many investors are not acting in their own best interests,
largely in response to increased awareness of the instability of the finan-
cial system brought on by a combination of economic events and some
deeply misaligned interests across members of the investment community
— most notably, the disconnect between investors’ desire for performance
and their perception that providers aren’t delivering. In response, the
industry’s current value proposition must change.
We believe this industry will continue to do what it has always done so
well in the past — embrace the change. Investors must rethink their goals
and be sure their investment activity is “healthy” and supports their objec-
tives. Investment providers will need to develop a deeper understanding
of what drives investor behavior and streamline their delivery models
so they can deploy resources in service of providing meaningful value
to investors.
Our research shows that now is the time for a new definition of performance
— one that is highly “personal” to the investor. Success — or failure — will be
measured by models that focus on the long-term sustainability of returns, defined
in terms of value to the investor and articulated with full transparency.
In the future, the investor will be the benchmark, and we anticipate that the
returns generated as a result will far outweigh those of the past. Now that’s an
influential investor.
“TOCHANGESOMETHING,
BUILDANEWMODEL
THATMAKESTHEEXISTING
MODELOBSOLETE.”
— Richard Buckminster Fuller

Authors
By Suzanne L. Duncan, Vanessa N.R. Forero, Kelly J. McKenna, Nicola Roemer
and Nidhi V. Shandilya
Acknowledgments
We would like to express our deep appreciation to our 200 interviewees and each
of our survey respondents for participating in our research.
We are grateful for each of our external and internal reviewers. Your feedback
was a valuable contribution to this research.
We thank our rotational team members from State Street’s Professional
Development Program, including: Ahmed Ismail Ah Abdullah, Thomas Dunleavy,
Samuel Humbert, Adebusola Laguda, Devon Sherman, Alexandre Vonray
Swayne and Andrew Xue.
And we are thankful for all of Rahul Sohani’s effort and hard work.

1 Twelve-month period ending in November 2012.
2 The term “income management,” used throughout, refers to
source-of-funding management, i.e., that component of perfor-
mance that diversifies or hedges against the investor’s primary
source of revenue or wealth. For an individual, that source
could be their employment industry or company stock. For an
SWF, it could be the primary revenue source for the fund, e.g.,
oil or other natural resources.
3 Center for Applied Research Survey analysis. Question asked:
In which asset classes are you currently/do you plan to be
invested in? Please indicate in percentage (total should be
100 percent). Data analyzed across different age groups and
showed few significant differences in allocations among them.
4 IMF. Global Financial Stability Report 2011 and 2012. “Global
pension fund asset allocation to alternative investments were 11
percent in 2006 and 16 percent in 2010. “SWFs with long-term
investment horizons have been increasing the share of real estate
and alternatives in their portfolios — a trend likely to continue.”
5 State Street Institutional Investor Services Survey analysis.
Question asked: Has the current low-yield market environment
increased your organization’s appetite for alternative invest-
ment strategies to meet funding demands?
6 State Street 2012 Asset Owner Survey analysis. Question asked:
Does your organization plan to increase its allocation to any
of the following strategies over the next year -- equity, fixed
income, cash, alternatives. Select all that apply.
Where does your firm have / expect to have the largest gaps
in your employee qualities over the next 10 years? Select up
to two. Understanding investor needs; Dedicated to following
industry ethical standards; Having a deep understanding
of potential risks; Having a global investment perspective;
Knowledgeable across asset classes; Anticipating changes
in market conditions; Specializing in an area of investment
strategy; Other, please specify.
8 Source: http://www.bbc.co.uk/news/business-15198789;
http://www.bankofengland.co.uk/monetarypolicy/Pages/qe/
default.aspx; http://www.guardian.co.uk/business/2012/sep/19
japan-asset-purchases-global-demand-china.
9 Central Bank Rates(http://www.cbrates.com/decisions.htm),
Global Rates (http://www.global-rates.com/interest-rates/
central-banks/central-banks.aspx)
10 Source: http://www.cboe.com/Institutional/
JPMCrossAssetCorrelations.pdf. About 40 percent of
current commodity/equity correlation is a spillover from FX/
equity correlation.
11 Further detailed information may be found in the research
article, “Principal Components as a Measure of Systemic Risk,”
by Mark Kritzman, Yuanzhen Li, Sebastien Page and Roberto
Rigobon, Journal of Portfolio Management, Vol. 37, No. 4,
Summer 2011.
To what extent would you agree or disagree with the following
statements in today’s environment? Please select one: Financial
Institutions are most likely to offer products and services in
the investment firm’s own best interest, or b) Financial
Institutions are most likely to offer products and services in the
client’s best interest.
13 Visa Inc. and Kiplinger’s Personal Finance magazine. Visa’s
International Financial Literacy Barometer 2012. The study
surveyed 25,500 participants in 28 countries. In no country did
the financial literacy rate exceed 50.5 percent.
14 Center for Applied Research Survey analysis. Questions asked:
Based on your current interactions with your primary invest-
ment provider, please indicate the extent to which you agree or
disagree with the following statements. Please rank on a scale
of 1-6 where 1=Strongly disagree and 6=Strongly agree. 1) I go
to my primary investment provider ﬁrst for any new investment
need; 2) I am not seriously considering switching providers for my
current investments; 3) I recommend my provider to my peers.
Which of the following hinder/impede your investment decisions
the most? Select up to two. Politics; internal company hindrance;
regulation; media; lack of talent; legal/contractual obligations;
high cost of switching providers; lack of sophistication; other; we
don’t face any obstacles in our investment decisions.
16 16 Center for Applied Research Survey analysis. Question
asked: What impact do you think financial regulation will
have over the next 10 years on the investment management
industry? Please select one: 1) Operational changes, which
means decreased cost for me, or 2) Operational changes,
which means increased cost for me.
Notes and references

What impact do you think financial regulation will have over the
next 10 years on the investment management industry? Please
select one: 1) Regulation will address the current problems, or
2) Regulation will not or insufficiently address the current prob-
lems (e.g., shadow system).
What hinders you from becoming more actively involved in your
own investment decisions? Please select one. Lack of time; Lack
of knowledge; Lack of money to pay fees; Skepticism about the
markets (I look at the markets but I am too skeptical to make
new investments); I am not interested in investing; I avoid being
involved because of what I might ﬁnd out; I don’t need to be
actively involved, as my partner / a family member takes care of
it; None of the above, I am actively involved; Don’t know.
19 Source: Forbes Online. “Financial Fraud Is
Growing, Post Madoff” http://www.forbes.
com/sites/financialfinesse/2012/06/07/
financial-fraud-is-back-stronger-than-madoff/
20 CFA Financial Market Integrity Outlook 2011. 5,735 members
of the CFA Institute participated in the survey.
21 Source: http://economics.about.com/library/glossary/gldef-
hyperbolic-discounting.htm
22 John Graham. “Value Destruction and Financial Reporting
Decisions.” 2006.
23 John Bogle. “The Mutual Fund Industry 60 Years Later: For
Better or Worse?” 2005.
For each of the following pair of statements please indicate which
one best describes you personally today and in 10 years. Please
select one: 1) Long-term decisions are important to me, or 2) It is
important I make good decisions for the short-term horizon.
Based on your current interactions with your primary invest-
ment provider, please indicate the extent to which you agree or
disagree with the following statement: My primary investment
provider’s fees are adequate.
26 Laurent Barras, Olivier Scaillet and Russ Wermers, “False
Discoveries in Mutual Fund Performance: Measuring Luck in
Estimated Alphas”, Journal of Finance, Vol. 65, No. 1 (February
2010): 179-216. Also see Burton Malkiel. The Financial Review.
“Reflections on the Efficient Market Hypothesis: 30 Years
Later.” 2005. According to Malkiel, roughly 15 percent of tradi-
tional long-only active funds have outperformed their specified
index on a sustainable basis. Also see Kenneth R. French.
“The Cost of Active Investing.” April 2008. In that paper,
French concludes that “…under reasonable assumptions, the
typical investor would increase his average annual return by 67
basis points over the 1980 to 2006 period if he switched to a
passive market portfolio…”
27 Jean Eaglesham. Wall Street Journal. “Overhaul Grows and
Slows.” 2011.
28 James Montier. “Behaving badly.” 2006.
29 Center for Applied Research analysis (for assumed rate of
returns): The data is based on an analysis of the top 1,000
US public and corporate pension plans as of September 2010.
Only 185 funds reported their assumed rate of return. The
weighted average assumed return for public pension plans
was 7.92% and for corporate plans it was 8.16%. The overall
weighted average assumed rate of return for both corporate
and public pension plans was 7.99%. The median assumed
rate of return for both types of plans was 8%); Reuters,
based on data provided by Callan Associates. For actual
rates of returns: http://www.reuters.com/article/2012/07/23/
us-usa-pensions-finreturns-idUSBRE86M1AA20120723.
30 EDHEC. “Asset-Liability Management Decisions for Sovereign
Wealth Funds.” 2010. Center for Applied Research analysis.
31 Source: Innosight LLC. Concept of decision making systems.
For further reading, see “Building a Growth Factory” by
Scott Anthony and David Duncan. http://www.amazon.com/
Building-a-Growth-Factory-ebook/dp/BOOA102LRE/
32 Source: ICI. http://www.iifa.ca/documents/1341497862_2012_
Q1%20International%20Media%20Release%20Text.pdf
33 Source: IBIS. http://www.ibisworld.com/industry/global/global-
commercial-banks.html
34 Source: EFAMA. http://www.efama.org/statistics/SitePages/
Asset%20Management%20Report.aspx
35 MFS investing sentiment survey 2012
http://www.mfs.com/wps/portal/mfs/us-investor/
market-outlooks/news-room/press-releases/!ut/p/
c5/04_SB8K8xLLM9MSSzPy8xBz9CP0os3j_

36 Center for Applied Research Survey analysis. Question asked: In
which asset classes are you currently/do you plan to be invested
in? Please indicate in percentage (total should be 100 percent).
37 Barry Schwartz. The Paradox of Choice. 2003
38 Ibid.
39 Source: Sheena Sethi-Iyengar, Gur Huberman and Wei Jiang.
Pension Design and Structure: New Lessons from Behavioral
Finance, pp.88, 91. Oxford University Press. 2004.
40 Center for Applied Research Analysis. Question asked: What are your
top strategic business priorities over the next 10 years? Select up
to two. Mergers and acquisitions; divestitures; new product devel-
opment; new solutions development; expanded risk management
capabilities; investment talent planning/talent management; gover-
nance model changes; client analytics/segmentation; compensation
structures; expanded regulatory compliance capabilities.
41 Source: Sheena Sethi-Iyengar, Gur Huberman and Wei Jiang.
Pension Design and Structure: New Lessons from Behavioral
Finance, pp. 88, 91. Oxford University Press. 2004.
42 IBM. What is big data? http://www-01.ibm.com/software/data/
bigdata/
43 Herbert Simon. “Bounded rationality and organizational
learning.” 1991. Bounded rationality is the idea that in
decision-making, rationality of individuals is limited by the
information they have, the cognitive limitations of their minds,
and the finite amount of time they have to make a decision.
It was proposed by Herbert A. Simon as an alternative basis
for the mathematical modeling of decision-making, as used in
economics and related disciplines.

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